Better 2H22F earnings on lower input costs
Despite high raw material prices, 2Q22 core net profit surged 40% yoy to HK$70m thanks to increases in instant noodles prices in HK and China.
We expect stable revenue growth and better profitability in 2H22F due to price adjustments in HK and easing Covid-19 impact in China.
Maintain Add. TP raised to HK$8.71, based on 18x ex-cash FY23F P/E. We lift FY22-24F EPS by c.1-4% to reflect lower raw material costs.
2Q22 boost from higher noodle prices, partially offsets rising costs
Nissin Foods (Nissin)’s 2Q22 core net profit, excluding deferred tax effect in 1H21, jumped 40% yoy to HK$70m, thanks to higher instant noodles prices in both HK and China, which partially offset the increase in raw material prices and logistics and production costs. 2Q22 revenue rose 9% yoy to HK$971m, driven by a strong HK market (+16% yoy) on surging demand for frozen foods and instant noodles during the fifth wave of Covid-19, while China market performance (+5% yoy) was dragged down by lockdowns in many cities in Eastern China. 1H22 core net profit grew 15% yoy, 3% above estimate, and formed 49% our previous FY22F forecast, due to stronger-than-expected HK operations. We expect a
stronger operational performance in 2H22F in both HK and China due to a substantial decrease in raw materials prices (wheat flour and palm oil), resumption of normal operations in China and another price adjustment for instant noodles in the HK market.
Better profit margins in 2H22F on lower palm oil price
2Q22 revenue from HK operations up 16% yoy (+11% yoy in 1H22) to HK$402m, driven by strong instant noodles and frozen food products demand given the emergence of a new Covid-19 wave in HK. 2Q22 operating profit grew 5% yoy to HK$29m, improving significantly from -15% yoy in 1Q22, underpinned by higher instant noodle prices which offset the impact from increases in raw material costs, while operating margin declined 0.8% pts yoy to 7.1% but improved +1.1% pts qoq. We believe profitability will improve in 2H22F due to another round of price increases in Sep 22 and decrease in palm oil price (Aug 22 average price fell by over 40% from the peak in 2Q22). We estimate operating profit margin in HK operations to recover to c.10% in 2H22F, with revenue growth of 7%.
China revenue and profit margins to recover in 2H22F
2Q22 revenue from China operations grew 5% yoy (+9% yoy in 1H22) to HK$569m, partly impacted by the Covid-19 wave in China. 2Q22 operating profit rose 25% yoy to HK$64m, driven by price adjustments for instant noodle products despite the poor performance in the distribution business during the pandemic. We expect revenue and profit margins to improve in 2H22F on easing of Covid-19 outbreak and strong seasonality.
Maintain Add; target price raised to HK$8.71
Stay invested. We raise FY22-24F EPS by c.1-4% to reflect lower raw materials prices. We now expect FY22F EPS to grow 13% yoy on favourable raw materials costs and higher instant noodle prices. We raise our TP to HK$8.71, still based on 18x ex-cash FY23F P/E, a 10% premium to its key Chinese competitors to reflect its sustained market share gains in China’s premium instant noodle market. Potential share price catalysts include stable raw material prices and stable revenue growth in the China market. Risks: increased competition in China’s premium instant noodles market due to lower raw material prices and prolonged Covid-19 impact in China.